Here's why Morgan Stanley expects this private bank to give 100% returns in two years

Global brokerage firm Morgan Stanley is expecting ICICI Bank's stock price to go up by 55 percent to Rs 775 per share in one year and 100 percent to Rs 1,000 per share in two years.According to the brokerage, the funding franchise is entrenched and the lender's cost of funds is now amongst the lowest in the group, implying a low risk of adverse selection. It also added that deposit growth is at decadal-high levels and loan spreads and NIMs are strong."This will likely drive 22 percent CAGR in core pre-provision operating profit between FY19 and FY22. Asset quality is also improving and credit costs will continue to decline. This should take its return on equity (RoE) to over 17 percent by F2022, which is not priced in," a report by MS stated.Asset quality is likely to improve quickly as the brokerage expects a sharp decline in provisions in FY20 with slowing new NPL formation."If we are correct on balance sheet and earnings progression, there could be material re-rating over the next few quarters," it added.ICICI Bank has surged 43 percent in the last 1 year and 42 percent in 2019 despite the demand and growth slowdown. Its peers have also risen in 2019, though not as much much as the lender. Axis Bank and HDFC Bank have gained 22 percent and 20 percent, respectively during this period.Kotak Bank was the only other private sector lender in the Nifty Bank which was also up in 2019, gaining 28 percent, while SBI was the only PSU bank in the green, up 14 percent, in 2019.In comparison, the Nifty Bank added 17 percent in 2019 while Nifty rose 11 percent.ICICI Bank has done well over the last 18 months, but its valuation is still at a deep discount to private peers, however, recent policy moves should provide a significant boost to multiples, Morgan Stanley noted.The stock can be volatile, given strong trailing performance, but as it delivers on earnings, we should see continued strength in performance, the report added.The brokerage gives 3 scenarios for the lender — base, bull, and bear:Base CaseIn its base-case scenario, the target price for the ender remains at Rs 775 per share. In this case, the brokerage expects lower credit costs and gradual recovery in growth for the lender. Domestic loan book growth is expected at 19 percent in FY19-22 and Margin will improve to 3.6 percent in FY20 and 3.8 percent in FY22.Bull CaseIn its bull-case scenario, the target price has risen to Rs 1,035 per share. This scenario is possible in case of a sharp rebound in economic growth. In this case, loan growth is much stronger than in the base case. Margins will expand materially in FY21, given a drop in deposit rates, even as loan demand remains strong. Asset quality trends are better than expected and the bank is able to repatriate capital trapped in weak subsidiaries.Bear caseIn its bear-case scenario, the target price is reduced to Rs 400 per share. This scenario is possible in the case of materially weak economic growth. Here, loan growth and margins are lower than in the base case. Impaired loan formation is higher than expected, driven by high slippages from corporate loans and restructuring in the infrastructure segment.Also, track all live market action on CNBC-TV18 Market BlogDisclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions


Read More